Kindle Phone or Kindle Fire HD? Which is more important for Amazon’s Future

Kindle Fire HD is more than just a Tablet for Amazon. It is a means to reach users and sell them things.

Kindle Phone, if it arrives this year, will be extremely important. Not just a Kindle Phone but a connection to Amazon.com and Amazon and all the products and services it sells.

The question becomes – Which is more important? Kindle Phone or Kindle Fire HD?

First, let’s look back at how Amazon used to make money.

Amazon made money from Electronics, Media, and ‘Other Things’

Amazon had three main income streams -

1. Electronics. This was the fastest growing income stream.
2. Media. This was mostly CDs (music), DVDs (movies), Games (Physical Game Discs), and Books (physical books). This was under threat due to the rise of things like iTunes.
3. Other Things. A whole gamut of things here including Zappos, Diapers.com, Websites, Advertisting, and a lot more.

Kindle was a means to tie up the revenue from books before Apple took over with iTunes or Google took over with Google Books.

Kindle Fire HD is a means to grab music and movie revenues before Apple, Google, and Xbox gobble up those income streams.

Amazon was on the losing side (physical media). The huge change in music showed Amazon that it had to be prepared. It faced the propsect of losing out its Media related income streams completely.

That’s REALLY what Kindle and Kindle Fire HD are about. It’s also what Kindle Phone will really be about.

The added bonus is that Amazon can add more services for users and add more things it sells to users. Most Internet and Technology companies are reluctant to get into selling physical goods (apart from electronic devices). They simply don’t want the hassle of selling Diapers and Kitchen Sinks and Raincoats.

So,

1. Amazon could either die (by ignoring the shift to digital in all physical Media (movies, music, books, games)).
2. OR Amazon could shift to digital. This would help it realize that ‘supporting digital’ actually makes Amazon stronger in Physical Goods too.

Of course, Amazon has evolved since 2006-2007 (when this decision had to be made). Before we jump into the relative importance of Kindle Phone and Kindle Fire HD, let’s look at all the things Amazon sells currently.

Amazon now makes money from Electronics, Media, Other Things, Digital Content, AWS, Advertising, Kindle & Kindle Fire HD sales

Here are some of the things Amazon sells now -

1. Electronics.
2. Physical Media (movies, music, games, books).
3. Digital Media (movies, music, games & apps, books).
4. Various things like Kitchen Sinks. Let’s call this ‘Sale of Other Physical Goods’.
5. AWS – Web Hosting in the Cloud. This is a big, big business now. Perhaps $3 to $4 billion a year in revenues.
6. Advertising – Supposedly $1 billion a year in revenue. This has the potential to be much bigger.
7. Kindle Fire HD & Kindle eReader Devices. Perhaps a few billion a year in revenue. If we assume 10 million Kindle Fire HDs and 3 million Kindles a year are being sold, it’s $2.3 billion a year.
8. Services to Authors – CreateSpace etc.
9. Content – Book Publishing & Movie Making.
10. Amazon Prime – 2-day free shipping service, Amazon Instant Video, Kindle Lending Library.
11. Audiobooks via Audible.com and BrillianceAudio (to make audiobooks).
12. Shoes & Jeans and more – Zappos.com.
13. High End Shoes & More – Shopbop.com and others.
14. Flash Sales – MyHabit.com.
15. Deals – Woot.com.
16. Websites - dpreview.com, Endless.com, IMDb, LoveFilm, The Book Depository, Junglee.com, goodreads.com.
17. Baby Products – Diapers.com. Part of Quidsi.
18. Pet Products – Wag.com. Part of Quidsi.
19. Local Deals – AmazonLocal and its investment in Living Social.
20. Amazon Wireless – The perfect setup for Kindle Phone.

It really is worth it to read a list of everything Amazon has acquired – Amazon Subsidiaries & Acquisitions.

The three big things in there, which are very new and promising, are AWS, Advertising, and Kindle devices.

Kindle devices are not very profitable (perhaps not profitable at all; Note: we are considering only device sales). AWS is unlikely to be wildly profitable. That leaves just Advertising as a very profitable business.

Amazon, fundamentally, has 5 or 6 very high potential long-term businesses -

1. Electronics.
2. Content Sales to Kindle Owners.
3. AWS.
4. Advertising.
5. Sale of Other Physical Goods.
6. Wireless services bundled with Kindle Phone and Kindle Fire HD.

A LOT depends on Amazon selling Kindle Fire HDs and Kindle Phones and setting up stronger connections with its customers and creating new customer relationships. Customers that are willing to spend money – Amazon will sell products and services to. The ones that aren’t, Amazon will package to advertisers as ‘audience’.

Kindle Devices (Kindle, Kindle Fire HD, Kindle Phone) are the new Amazon.com StoreFronts

Basically, to understand which out of Kindle Fire HD and Kindle Phone is more important for Amazon’s future, we need to understand what the future buying patterns of users might be.

People are switching/shifting from ‘Buying on PCs and in Stores’ to ‘Buying on Phones and Tablets and on PCs and in Stores’. Chris Dixon has a very interesting post on ‘The Shift to Mobile’.

Three paragraphs are key. First:

People tend to lump smartphones and tablets together as “mobile”. This can be misleading. Ask people who run internet companies and they’ll tell you that user behavior on tablets is far more similar to user behavior on desktops/laptops than it is to user behavior on smartphones.

Points in favor of Kindle Fire HD being more important are – People shop more often (as a percentage of time of use) on Tablets, People spend more when shopping on Tablets, Tablets are closer to desktops, Tablets actually allow shopping easily.

Points in favor of Kindle Phone being more important – People have their phone everywhere, more People own phones, People use their phone a lot more, People usually have their phone (and not their tablet) when in a store and deciding whether to buy there or at Amazon.com.

The 2nd and 3rd important paragraphs:

App stores have had a few important effects:

1) They take 30% of revenue, which scares away most big companies (e.g. Microsoft) and also startups/venture capitalists. Not many businesses can survive an immediate 30% haircut.

The best entrepreneurs understand these dynamics and have been exploring “attach” business models, which basically means charging for something outside of the app store, like offline products/services (e.g. Square, Uber), online services (e.g. Spotify, Dropbox), and sometimes even hardware.

Amazon knows it can’t afford to pay 30%. Remember, its overall margins in 2012 were 1.1%. That’s 1.1% total margins. Even Amazon can’t afford a 28.9% loss on sales.

Amazon is left with just two options -

1. Sell ‘Apps’ for customer acquisition and then route them to buy from the Web (i.e. outside the App Store).
2. Build its own devices and its own app stores.

It’s choosing both routes. However, the second route is far more promising.

Why?

Apple and Android can do a lot of things to slow down Amazon’s plans in the Apple App Store and the Android Google Play Store -

1. Levy taxes.
2. Hide Apps.
3. Give a boost to competitors.
4. Make a competing app the default.
5. Sell services themselves.

If it’s Amazon’s store, not only can it avoid all these things, it can do all these things for its own services. It can even keep out competitors entirely (the ideal situation).

Kindle Fire HD is the Bridge Device

eInk Kindles were a test.

Kindle Fire HD is the Bridge Device.

Kindle Phone and wearable computing devices like Kindle Watch will be the REAL Amazon.com storefront.

Why is Kindle Fire HD just a Bridge Device?

1. Tablets aren’t with users all the time. This is absolutely key. Most users have Tablets only at home or only at work. Even the ones that carry them everywhere don’t take them out of the purse/bag/briefcase very often.
2. Tablets are digital content consumption focused. They aren’t good for creation and they aren’t very good for shopping. Remember, users are getting trained to buy $5 books and $10 movies and play free games. More importantly, they are getting trained to spend hours and hours on these $5 books and free games and $10 movies. That’s the exact opposite of what an efficient storefront is.
3. Tablets are not focused on ‘pure shopping’. They aren’t optimized for it. The software isn’t optimized for it.

Think of Tablets as the ‘Facebook, Twitter, and Tumblr’ of Storefronts. People don’t spend much but they spend a lot of time.

Why will Kindle Phone and Kindle Watch be the REAL Amazon.com storefront?

1. Users will have them ALL the time.
2. Users will be trained to do big purchases on them. Note: This will be very subtle. Just like Amazon removed physical keyboards from Kindles to focus users on reading and buying.
3. Users will be trained to avoid ‘low price, long time’ purchases. This too will be subtle.
4. Phones are already associated with ‘action’ and ‘business’ and ‘getting things done’. The downside of making Tablets focused on ‘consumption’ is that you don’t have that ‘let’s buy something’ feeling on them. People do shop on Tablets, but not the way they would on devices actually built for shopping.
5. Kindle Phone and Kindle Watch can be further down the slippery slope of ‘Kindle Storefront’ and not your device. Think of how we’ve gradually gone from Kindle 1 with SD card to Kindle Fire HD with ‘recommendations’ and ‘screensaver ads’ and ‘buy, buy, buy digital content’ focus. The next step is a device that’s even more of a digital storefront – except, this time it’s a digital storefront to buy both digital and physical products from Amazon.

Basically, the combination of Kindle Phone being with the user all the time, Tablets being ‘poisoned’ as cheap/free product consumption devices, and Amazon getting to tailor Kindle Phone more for ‘buying everything and buying expensive things’ means that Kindle Phone will be far more important than Kindle Fire HD.

Biggest Reason Kindle Phone is more important – Number of Kindle Phones Sold

Amazon has sold perhaps 10 to 18 million Kindle Fire HDs and Kindle Fires. That’s a rounding error compared to iPhone and Android Phone sales.

Amazon needs a Kindle Phone that sells 100 million units.

If/when that happens, Kindle Phone will instantly have 4 to 5 times more users on it than Kindle Fire HD. That alone would make it far more important.

However, it would also have the advantages we’ve discussed in the previous section. The most important being that it will be set up to not route users to ‘$5 for 5 hours of your time’ consumption, and instead towards ‘buy this crystal vase for $75 and this pair of indigo denim jeans for $175′.

We haven’t yet seen what a device tailor-made for ‘buying from Amazon’ looks like. This is mostly because -

1. Amazon is still learning how to make devices.
2. Amazon is still learning user behavior and how to subtly tweak and influence it.
3. Amazon doesn’t want to reveal its plans. With the Kindle, most people didn’t understand it was an Amazon storefront (though we’ve been saying this for years – What the Kindle was meant to be). Despite all the obvious signs, most people don’t realize Kindle Fire HD is just a natural progression along that same roadmap.

Of course, there’s the risk that at some point Amazon strays too far and loses its ability to actually sell devices – because they aren’t even really devices any more. However, people have an infinite capacity to accept gradual change without thinking about what it means in the long-term.

Kindle Phone and Kindle Watch are literally Amazon’s Future Survival

The shift was supposed to be – Retail to Online Retail. It’s actually turning out to be – Retail to ‘A Weird Mix of Retail + Mobile Retail + Online Retail + Digital’.

This is a big problem for Amazon because Amazon is optimized for ‘Online Retail’. Imagine, if you will, a world where the shift happens from Retail to Mobile Retail.

Guess who’s best positioned there? Google and Apple. Android and iOS would become the ultimate Retail Enablers. Would they really allow Amazon to operate freely?

No.

Google has exactly ONE billion dollar business – Advertising. It needs something to hedge against that. Mobile Retail would do very, very well. Google is already doing a lot of things to set that up – local deals, maps, location services, Google Shopping, etc.

Apple might well decide that it wants to create a ‘Store Front’ like the App Store and like iTunes. Let people sell products and give Apple 10% or 15%. It has the most lucrative 100-200 million customers. Might as well make a cut from their flight purchases and Christmas Gifts and Car Purchases (until iCar arrives with italian leather seats and ‘shut up and let the car drive’ driving rules).

Amazon would have no place at all if Shopping shifts from retail to mobile. Because mobile isn’t very open. It’s Apple’s closed ecosystem and it’s Google’s ‘The Default rules and users just gravitate to the Default’ ecosystem.

Basically, Kindle Phone and Kindle Watch (at least one) have to sell hundreds of million of devices. Amazon is positioned for a shift to Online Retail. The actual shift looks to be happening to Mobile Retail. Kindle Phone and Kindle Watch are Amazon’s means to establish itself in Mobile Retail. If they fail, perhaps so does Amazon.